chapter 14 legal

Zheng and Nate properly form their corporation and issue a total of 100 shares and retaining 51 shares to be owned by their limited partnership. Zheng's mother, Li, decides to invest her life savings to purchase the remaining 49 shares. As the corporation expands, Zheng, Nate and Li mingle the corporation's assets with their personal assets. The three owners do not follow the corporate formalities provided for in the organizational documents. To fund the acquisition of the other company, the corporation takes out several million dollars in loans. The corporation never makes a single payment toward the loans due a drastic drop in the bitcoin market. The lender sues the corporation for the loan amount but the corporate account is empty. Could Zheng, Nate and Zheng be held personally liable for the debts of the corporation?

(Closely held corporation) yes , the court could deciden Shareholders are not liable for the debts --> Court will make expectation when you have abused corporate form: not making payments for loans and also taking money out of corp

Why would you form a LLP over liability and vice versa?

- In limited only limited partners have shield, in LLP all members have some protection from liability - Everyone is actively involved in the partnership

pros to Limited Liability Companies

-Treated as nontaxable entities -Owners have more flexibility compared with S corporation -Membership is not limited to individuals

limited liability partnership

- All partners have some liability protection - All partners considered general partners - All partners can participate in the operations of the business - LLP partners are still liable for their individual negligence - Taxed at the partner level - Commonly used by professionals (attorneys, accountants, doctors)

Alli vs. US

- Allis had put no money in corporation, couldn't pay one million, but shareholders had - Shareholders used the corporation to defraud customers and/or counterparties - The shareholders commingled corporate and personal assets -The alli's were the sole owners Commingled personal and corporate funds - Took out loans in the name of the corp. But used them for personal means Alli's failed to maintain the buildings in a decent, safe, and sanitary conditioned Corporation was thinly capitalized so it could not pay the damages *corporate veil was pierced*

Change the facts: Stan hit Mable while he is swinging by to visit his gf

- Mable would sue MPS, then they would fight to see if he was in scope of his employment - MPS will say he was in frolic and detour (visiting gf) --> Question of fact for jury to determine. Mable would be able to sue just stan not MPS

general partnership pros

- creation can be automatic but may be modified by agreement - taxed at the partner level only

pros of sole proprietorships

- least $$ business organization to create - not taxed as an organization - in total control of the business's goals and operations

pros of corporations

-Corporation has perpetual existence (stays forevs) - Shareholder's death or sale of stock does not affect the organizational structure - Limited personal liability of owners -Allows for a large number of owners

cons of corporation

-Created by a state issuing a charter upon the application of incorporators -Corporation must be licensed to be able to conduct business in foreign states -Taxes at the corporate and at the individual owner's level -Lack of direct control by the owners

Duties of agent (me) to principal

-Duty of loyalty -Duty to keep the principal informed -Duty to obey instructions -Duty to account to the principal for monies handled

Angered by the IRS audit and looking to avoid entity-level taxes, Nate, Zheng and Li consider converting the corporation to an s-corporation. Would the entity qualify to convert?

-Entity would need to the elect -Has to be a unanimous vote

general partnership cons

-dissolved whenever one partner withdraws - each partner has an equal voice, which can lead to deadlocks - personal liability and joint and several liability for all debts and liabilities

cons of sole propietorships

-proprietorship's continuity is tied directly to the will of the owner -owner is unlimited liability for the obligations of the business organization

explain Corporate Management Structure

-shareholders elect the ... Board of Directors who hire.... Officers (CEO, CFO etc) who hire: - Employees

S-Corp.

-shareholders of s-corporations elect unanimously to have the corporation treated as a partnership for tax purposes -Shareholders must account on their individual income tax returns for their share of the corp's profits or losses

what are the 5 LEGAL methods to avoid double taxation?

1. Reasonable salaries 2. Reasonable expense accounts 3. Reasonable loans from shareholders 4. Reasonable accumulation of earnings 5. Subchapter S election

What is the status that is critical for a non profit to obtain?

501(c)(3) --> Aka (Non profit status)

Corporations

Artificial and intangible entity created under the authority of a state's law

Apparent authority (would agent be liable to principle?)

Authority perceived by a third party when no actual authority exists and yes agent would be liable to principle

implied authority and ex

Authority that is incidental to express authority (arises from the position held and by the history of express authority) Ex: purchaser for retailer, nordstrom, implied from your position that you can enter contracts

What is the corporate form that does not provide a tax exempt status but does allow the organization to seek profit and social goals?

Benefit corporation

What is an agent?

Employees & independent contractors

Include all legal features of a corporation, except:

Cannot have more than 100 shareholders Only individuals (not entities) can be owners

limited partnership; where might certificate be signed

Certificate must be filed in the county of its principal POB and additional copies in other counties/states where LPship conducts business

Benefit Corp.

Combines aspects of non-profit and profit organizations -Pursues explicit socially oriented goals - Specifies public benefit in articles of incorporations -Reports on public benefit -Taxed as a regular corporation ex: patagonia

How will the profits from the operations be taxed?

Corporate form : double taxation Entity level and shareholder level

Why would someone choose corporate form over LLC?

Corporate form offers the best opportunity to raise capital by selling a lot more shares. Corporations' shares can be traded on public exchanges. Most investors like that liquidity. LLCs are usually smaller companies that have a smaller number of members (owners). For a company with a small number of owners, LLCs are tough to beat.

Let's say that Zheng and Nate's business is taking off. They have 200 bitcoin ATMs across the southeast, but they would like expand their operations across the country. They devise a plan to buy out another bitcoin ATM operator but need hundreds of thousands of dollars to do so. What type of business entity should they consider converting to?

Corporation Looking to be able to bring a large amount of fund in by selling shares

factors to consider in business organizations

Cost of creation Continuity of organization Managerial Owner liability Taxation

The corporation gets audited by the IRS since they had not paid any corporate taxes since incorporation. Upon a review of the records, the IRS auditor determined that the Nate and Zhang paid themselves reasonable salaries as officers of the company, maintained reasonable expense accounts and retained a reasonable amount of earnings. what is the result?

Everything is reasonable You would be ok in terms of audit --> If nate and zhang paying themselves above market salaries From audit perspective: you would be good here, even though taxed at

actual authority and give ex

Express (written, spoken or derived from the circumstances) authority given to an agent Ex: going to recruiting events; hiring manager has express authority to sign

Why would you choose a c-corp vs s-corp?

If you want to be a huge corp, you can raise so much more capital as c-corp

What other form might Nate and zheng consider converting to?

LLC Are similarly treated in terms of taxes, taxed at member level as opposed to shareholders of a corporation

Malik, Grant, and Sarah are recent law school graduates. Deciding that the big law firm life was not for them, they have decided to strike out on their own. If they are interested in limiting their liability and avoiding double taxation, what type of entity would you recommend for them to form?

LLP Professionals: Lawyers, doctors, accountants --> Not double taxation for limited liability partnership

Prior to the drastic drop in the bitcoin market, Li had become disgruntled because Zhang and Nate never voted to issue dividends to the shareholders but instead paid themselves reasonable salaries, maintained reasonable expense accounts and retained a reasonable amount of earnings. - What is the likely result if Li sues? (And what is this lawsuit called?)

Li could sue Derivative lawsuit There is no breach of duties in this case

What if zhang and nate paid themselves above market salaries

Li would most likely win this derivative lawsuit , as majority shareholders they have to act in best interest, and they are not because not fair salary

non-profit corp qualifications

Must be approved by the IRS- 501 ©(3) Created for a specific reason allowed by law Must be created for a public purpose and not to personally benefit owners or members Must return any profits made to the organization to be used for future operations Can have their tax exemptions revoked

If sarah commits malpractice, could she use the LLP form to shield herself from paying damaged

No because in this one they are liable for their individual negligence --> CANNOT USE LLP FORM TO SHIELD SELF FROM MALPRACTICE OR NEGLIGENCE

What usually happens if you have minority shareholder that sues because they haven't received a dividend

Nothing, they don't win as long as they are acting in best interest of corporation but lee would probs lose

Criminal liability

Organizations may face criminal liability for the criminal actions of its agents

Corporate Liability General rule:

Owners are liable for debts only to the extent of shareholders' investment in the cost of stocks

When Zhang graduates from Terry, he lands a job as a risk analyst for UPS. Since he lives economically, he accumulates some savings in a few months. His friend Nate approaches him with a business proposition that would require Zhang to invest his savings and Nate will then take the money and purchase bitcoin ATMs. Zhang and Nate will make a fee on each exchange of currency for bitcoin. What type of business organization have Zhang and Nate formed?

Partnership --> General partnership because they can be formed automatically by the behavioral of the parties

explain corporate taxes

Profits are taxed at corporate level and then dividends taxed at individual level

Millie graduates from Terry and starts on her job as a financial analyst. On the side, she starts creating custom graphic designs for organizations to use for their branding. What type of business organization has Millie formed?

Sole proprietorship; because they are formed automatically by operation of law

test for tort

Test: whether the employee was in the scope of his/her employment?

C-Corp.

The big ones that we know about

What steps would they need to follow?

They would have to draft and file that charter with that secretary of state in that state.

How will she pay taxes on the profits from her business?

Through her personal income (10:40) personal tax statement, business taxed on personal income

If millies graphic design business grows and she hires employees whole negligently injure a third person while in the scope of their employment, could millie be personally liable for the damages?

Yes Personal liability bc sole proprietorship

As a result of you signing the contract with Rihanna without express permission, your boss demotes and takes away your authority to sign contracts on behalf of the company. Angry, you call back the same agent and ask for a contract with Weird Al Yankovic. Perplexed but excited, the agent offers you a contract for $100,000. You sign it. - Will your company be liable for the $100,000? What type of authority did you have?

Yes ;Apparent authority From their perspective they are just seeing you enter a contract Company should have reached out to people you contract with, since they no longer bind with you.

Stan, a driver for MPS, was texting and driving when he ran over Mable in a crosswalk while on his regular route. The accident left Mable paralyzed from the waist down. Mable sues MPS for her medical bills, lost wages, and pain and suffering. Is MPS liable for the damages caused by Stan's negligence?

Yes because he was on the job, yes he was negligent; the plaintiff could sue both stand and mps -->Principle is on the hook for the negligent acts of their employees as long as they are in the scope of their employment

Upon graduating, you get hired by a company that arranges musical acts for music festivals. Your job is come up with a lineup for a show, propose the lineup to your boss and then attempt to procure contracts with the artists. - Your first proposal identifies Lizzo as the headliner and estimates that booking her would cost between $200,000-$300,000. Your boss likes the idea and tells you "go make it happen." - You sign a contract with Lizzo for $300,000. • Is your company liable to pay the $300,000 to Lizzo for her performance? What type of authority did you have?

Yes, and it is actual authority You have the express actual authority of your boss Proposed idea, given estimate of what it could cost

You get a call from Lizzo's agent who tells you that due to an infection of her vocal cords, Lizzo has to back out of the contract. She offers you a contract with Rihanna for the same amount. You sign the contract right away knowing that this opportunity will not last long - You go back to your boss who is disappointed with the replacement contract. • Is your company on the hook for the contract? What type ofauthority did you have?

Yes, because here you have a history :implied authority to enter into this contract

If they wanted to maintain this situation where zhang is a limited partner, zhang must

Zhang has to stay out of the management, he is just putting his $ in --> He could still enjoy liability shield

what If zhang wanted to have limited liability what would they need to do ?

Zhang(limited partner) and nate (general partner) need to Limited partnership certificate

how can a partnership avoid problems that arise when a partner dies or withdraws from the partnership?

a buy- sell agreement

Agency Law. General rule:

a principal (the organization) can be held liable for the damages caused by its agent.

Contractual liability

actual authority implied authority apparent authority

Partnership

agreement between two or more persons to share a common interest in a commercial endeavor and share in profits and losses

Tort liability General rule:

an agent who causes harm to a third party may create liability owed by the principal to the third party

closely held

an organization that is owned by only a few people -->Family-owned and family-operated businesses - No ready market for minority stock should shareholder desire to sell it - Minority shareholders are subject to the decisions of the majority

cons to limited liability companies

articles of Organization must be filed with state

Publicly held ownership

business owned by hundreds or thousands of person. business stock is traded on public exchange

alter-ego theory:

corporate entity is disregarded so that there is unity of ownership and interest (commingling of corporate and personal assets)

What tool does a minority shareholder possess when the majority shareholder (s) is acting illegally or oppressing the minority by acting in his/her personal interest?

derivative lawsuit

true or false: A business is likely to stick close to sole proprietorship form as it becomes more successful

false business is likely to shift away from the proprietorship

true or false: all partners in a general partnership have limited liability for their organization's debts

false general partnership have unlimited liability for their organization's debts

types of partnerships

general partnership limited partnership limited liability partnership

What it is the Primary advantage to forming a limited partnership ?

less risk as a limited partner, more people are willing to invest without being liable

What factors should you consider when choosing a business form?

liability cost of creation managerial control of decision tax structure continuity of the organization

what do general partners do?

manage and control the company

are limited partners responsible for the debts/liabilities of the organization?

no they aren't, unless they participate in the management or control of the organization

are limited partners automatically formed?

no, unlike partnerships

Benefit corporation examples

patagonia Kickstarter Plum organixs

exception to general rule:

piercing the corporate veil: shareholders are treated like partners and are subject to personal liability for the liabilities of the corporation

are general partners personally liable for the organization's debts?

yes

can limited partners assign interest without dissolving the partnership

yes

Frolic and detour:

you can go so far out in you employment in duties that you are no longer in employment